So you reside in Canada but you’re a U.S. citizen, surely ‘Uncle Sam’ has no right to your Estate on your death. Unfortunately, regardless of whether a U.S. citizen resides in the United States, U.S. citizens are subject to U.S estate taxes when the pass away based on the value of their worldwide estate. A credit is available which does alleviate some of the tax burden by exempting a certain amount from the U.S. estate tax net.

At the moment the state of U.S. estate taxes is in a bit of flux. When The Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) was adopted in 2001, the maximum U.S. estate tax rate was reduced over time and the exempt amount was increased. However, the EGTRRA was set to sunset at the end of 2009 unless Congress took steps to prevent its repeal. With the lack of action on Congress’ part at the end of 2009, the EGTRRA was repealed.

The implications of this are, in part, as follows.

To the extent a U.S. citizen passes away in 2010, their estate is not subject to any U.S. estate tax. In practice though, the planning option of “pass away this year” is not what clients like to hear. The difficulty with planning at the moment, however, is it is unlikely we will know what the regime will be until 2011.

Unless Congress takes action before the end of 2010, U.S. estate taxes will revert back to the rates and exempt amount in effect in 2001. The unified credit will shelter the first US$1 Million of assets. (To put this in perspective, the amount that was shelterable at the end of 2009 was US$3.5 Million.) Assets above that amount will be subject to tax at a rate of 55%. (In 2009, the rate was 45%.)

Added to the application of U.S. estate taxes, a U.S. citizen, resident in Canada will also be subject to the Canadian income tax regime on his or her death. There are some issues between the manner in which the U.S. estate tax rules and the Canadian income tax rules dovetail together on an individual’s death. However, the Canada-U.S. Tax Treaty does provide relief, provided appropriate planning is put in place.

Planning options range from engaging in a gifting strategy, ensuring assets are transferred to a surviving spouse in a manner which will defer the payment of both U.S. estate and Canadian income taxes until the second death, to structures utilizing inter vivos trusts and limited partnerships. It’s important to be aware that the U.S. estate tax regime is coupled with a gift tax regime as well. Otherwise people would simply give all their assets away before they passed away. Notwithstanding, there are gift tax exemptions available that allow for a gifting strategy to be implemented.

In the end a U.S. citizen may determine not to engage in any planning now but to wait to see what happens at the end of 2010, which is only a short while away. The view amongst professionals is that Congress will re-enact the legislation on the terms provided for at the end of 2009 i.e. a US$3.5 Million exempt amount, with a 45% tax rate. However, given we were surprised that Congress let the EGTRRA legislation lapse at the end of 2009, the current state of the US economy and the fact that it is already the end of October, it is difficult to guess what will happen.

Stay tuned for a blog on the implications of U.S. estate taxes to Canadian residents/citizens.

Corina Weigl is a partner in the Trusts, Wills, Estates and Charities group at Fasken, a leading international law firm with over 650 lawyers and 9 offices worldwide that offers comprehensive estate planning, estate administration, personal tax planning, charitable giving and estate litigation services.
Email: cweigl@fasken.com